KYC & AML: Key Differences and How They Work Together

KYC and AML measures are essential in fighting fraud. They involve rigorous checks to verify individuals or organizations, but understanding their differences is crucial for effectiveness.

Consult Hyperion estimates that the average bank spends around $60 million annually on KYC alone. When calculating the full cost of AML, one must also consider expenses for transaction monitoring software, legal compliance, and reporting suspicious activities. The financial aspect alone underlines the importance of clearly understanding and optimizing these processes. 

This article provides an overview of KYC and AML and how they enhance financial security.

What Is the Difference Between AML and KYC?

AML stands for anti-money laundering. It’s a legal requirement for businesses to learn more about users and customers and their source of funds. There is a stronger focus on understanding where customers get their money and how they spend it, in order to avoid doing business with criminals who may use your business to launder money.

KYC stands for Know Your Customer. It’s also a legal requirement for certain businesses that forces them to learn and confirm the identities of users and customers. It’s also a helpful process to reduce fraud and cybercrime because if you can confirm someone’s identity, they are less likely to get away with fraud.

In short, both KYC and AML are legal requirements. Regulation for both processes is designed and monitored by governments. Both require businesses to learn more about their users in order to be compliant. However, KYC focuses strictly on understanding your customers’ identities. AML focuses more on understanding where their money is coming from.

How Does the AML Process Work?

The Anti-Money Laundering (AML) process includes identity verification, risk assessment, transaction monitoring, and reporting suspicious activities. To stay compliant, companies must keep detailed records, enforce internal policies, train employees, and conduct audits.

Let’s examine what a standard AML process looks like:

1. A new user registers on your platform.
2. You ask for their full name and address.
3. You ask for an ID document and verify it is authentic.
4. You check their name against PEP lists, crime lists, watchlists, etc.
5. You check their country of residence against sanctions lists.
6. You continuously monitor how much money they move through your company, and to whom.

As you can imagine, the last part is particularly challenging. Here again, this is why companies rely on transaction monitoring software to take care of all that data in a safe and compliant fashion.

How Do KYC Processes Work?

To meet KYC compliance components, your company must gather information about its new customers, usually during the signup or onboarding process. The information must include:

• proof of full name using an ID document (passport, ID card, driver’s license..)
• proof of address (utility bill, lease…)

Let’s now break down the KYC process into a few simple steps. 

1. A new user registers on your platform.
2. You ask for their full name and address.
3. You ask for an ID document.
4. You verify that the document and other information match.
5. You confirm the identity and allow registration.

Manual identity verification isn’t scalable for medium or large companies. Criminals often attempt to bypass KYC processes, so most companies use third-party KYC software for identity verification. To ensure compliance, refer to our downloadable KYC Checklist.

The Importance of AML & KYC Compliance

KYC and AML are important for both businesses and the economy. Regardless of whether you need KYC only or both KYC and AML, it’s in your company’s best interests to meet all the right regulations, for reasons such as these:

• Avoid heavy fines: Government regulators will make an example out of your company for failing to meet compliance.
  
• Maintain a better reputation: Compliance issues are never great for PR – either with customers or stakeholders.
  
• Make life harder for criminals: A more secure onboarding and monitoring process can, in theory, make life harder for criminals.
  
• Secure your business processes: There are a lot of overlaps between KYC, AML, and general safe business practices. Identifying bad actors can reduce fraud and cybercrime, and keep your business secure in the long run. 

The Benefits of Combining AML and KYC

Compliance can be costly and complex, with a single KYC check costing up to $130. That’s why many businesses combine KYC and AML checks into one streamlined process. Here are the advantages of such an approach:

• Save on operational costs: Streamlining KYC and AML processes reduces the need for multiple systems, saving money over time.
• Reduce user friction: Collecting necessary data once minimizes user prompts, enhancing the customer experience.
• Eliminate data silos: KYC and AML data often get siloed, but using one system for both can unlock valuable insights. This unified data can aid in user segmentation, tailored financial products, and marketing efforts.

SEON offers a standalone AML API to assist with your AML and KYC checks. This API can function independently or as part of our Fraud API, which aggregates hundreds of data points about a person, their email, device, IP, and more to provide a comprehensive, real-time view of your customers, flag AML risks, and prevent fraud.

Enhancing AML/KYC Compliance

Many companies focus on identity verification in their KYC and AML efforts, but there’s a powerful approach to consider: transforming data into behavior analysis. This means not just collecting user information but understanding and utilizing it to gain deeper insights into your customers.

Here’s how having more data can benefit financial institutions and neobanks:

• Filtering out junk users: Gathering data during onboarding can identify and exclude unqualified users early on.
• Saving on official checks: Conducting pre-KYC and AML checks helps reduce the cost of formal verifications.
• Tailoring offers and segment customers: Repurpose user data to create personalized offers and effectively segment your customer base.
• Demonstrating user understanding to regulators: Show regulators that you genuinely understand your customers rather than simply repeating data.
• Increasing flexibility: Adapt your AML and KYC rules more effectively based on comprehensive data analysis.

How SEON Complements the KYC & AML

At SEON, we collect diverse data to help you understand user behavior. Our comprehensive AML API checks customer names and their variations against PEP, RCA, sanctions lists, crime lists, and other watchlists.

Whether you need additional information for a KYC check or sophisticated AML transaction monitoring, our API-based modules enable you to:

• Gather real-time user information: Access data on social media accounts, device types, IP connection details, and more.
• Check AML lists: Identify if a person appears on PEP lists, crime lists, sanctions lists, and more, including relatives.
• Verify customer data: Ensure that the gathered information matches your customer’s details or flag discrepancies.
• Support manual KYC checks: Retain data for KYC verifications and assist with manual checks when necessary.
• Monitor user behavior: Continuously track users to understand their online behavior.
• Conduct transaction monitoring: Keep an eye on transactions to detect suspicious activity.
• Generate SARs: Source data to include in any Suspicious Activity Reports (SARs) required for compliance.

Using SEON helps you instantly filter out bad users and improve your overall service in the long run.

FAQs

Sources

• Consult Hyperion: Know Your Compliance Costs

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• SEON: The Best Five Sanctions Screening Software & Tools in 2024
• SEON: Top Anti Money Laundering (AML) Software & Tools 2024